Tom served as president of Hakuto America, a division of Hakuto Co., Ltd. (a Japanese technology-oriented trading company). He was director of Hakuto’s investment program in the U.S. and Europe, leading and supervising investments in 11 technology companies with a value of $100 million+. He later joined OEM Capital, a technology-focused investment banking firm, gaining five years of deal-making experience. In addition, Tom co-founded an Illinois-based distributor of electronic components, Strategic Switch & Audio.

Tom holds an MBA from Yale University and a BA from the University of California at Berkeley and is fluent in Japanese.

Cross Border Deals: What to Look for and How to Manage

My firm has been approached by foreign firms several times this year and in 2017 who want to acquire PCB, PCBA, or other electronics companies in North America. This could certainly be a trend in the future. There are a wide variety of reasons why overseas firms would like to acquire a shop in North America:

Market access, which is especially timely if U.S. trade policies change or if the U.S. imposes more tariffs in the future

There have not been a lot of overseas buyers in the North American PCB/PCBA industry over the past few years, but here are a few examples:

Somacis (Italy)/Hallmark

Graphic (UK)/IPC Calflex

Ultra (UK)/Sparton

Whatever the reason, North American shops should be prepared in case a buyer comes knocking. Getting prepared in advance is a good idea if the owner is thinking of retiring, as a good buyer might move on to the next seller if the company is not prepared. Whether the buyer is domestic or foreign, good preparation includes having financial statements prepared by an outside CPA (audited or reviewed is preferred), cleaning up any balance sheet issues, having good corporate documentation, and understanding the process and the typical valuations and terms for companies in the industry.

It is difficult enough to put together deals between two U.S. parties that have already agreed on price, terms, and post-closing strategy. Adding the complexities of a cross-border deal just makes everything more difficult. So why deal with a foreign buyer? Because they may have put forward the best offer (or perhaps the only decent offer) based on the strategic reasons listed above. Also, a strategic foreign buyer might be more interested in keeping a facility in place and making investments. Being aware of the following issues with help to get a deal completed.

Some of the issues that are particular to overseas buyers include:

1. Communications

This is usually the biggest issue in overseas deals. Communications can be difficult even between two U.S. parties during a transaction, and if a foreign language is involved it becomes more complex and time-consuming. It is important to be patient, and it can be helpful to hire an interpreter for at least one or two initial meetings. Even if the buyer’s team speaks good English, an interpreter can help make sure that there are no misunderstandings.

2. Lengthy Transactions

Not only due to time zone differences, but overseas buyers may have multiple decision-makers, and travel is more expensive and time-consuming. Be prepared for deals to take extra time, but balance being patient with the need to keep the deal moving.

3. ITAR Issues

If the U.S. shop has significant military/defense revenue, foreign buyers may not be able to retain this business after a transaction. Even a ‘friendly nation’ buyer may lose some of this business. Be sure to have this discussion up front with the buyer early in the process.

4. U.S. Government Approval

Like ITAR issues, the U.S. government has shown reluctance to approve deals that involve sensitive technology. Have an attorney who is familiar with these issues investigate the risks early in the process.

5. Regulatory Issues, Taxes, Environmental Matters

These issues are difficult for domestic firms to follow, let alone a foreign buyer. For example, in the case of PCB shops, it may be difficult to obtain permitting if the buyer wants to move the shop to a new location. It is important that the foreign buyer have competent local advisors who are aware of these issues, and to avoid any surprises at the last minute (or after closing).

6. Knowledge of Local Customs and Practices

When engaging with suppliers, customers, employees, and other stakeholders, foreign buyers often do not understand the nuances of local customs. There can be a large difference even between California and New York company customs, so adding an overseas component can exacerbate the issue. Be sure to explain any important practices, and do not assume that the buyer understands things. The seller’s employees may be nervous about being sold to a foreign buyer, so it will be important to explain the deal properly. Also, foreign buyers might not be familiar with the culturally diverse workforce in North America. There are various consultants who specialize in doing business with different cultures, which can be helpful in educating both parties and smoothing out the differences.

Those are some of the major issues, but certainly other issues can come up. For example, if the dollar strengthens or weakens during a deal, it might change the financial models of an overseas buyer. Also, global politics or other events might derail a deal. We once had a deal fall apart because a foreign buyer could not believe that a U.S. PCB shop could make such high-end products for space applications using 20-year-old equipment. It is important to be prepared, patient, and open to cultural differences when working on a cross-border deal.

Tom Kastner is president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Securities transactions are conducted through StillPoint Capital, LLC, Tampa, FL member FINRA and SIPC.

I am often asked about some of the reasons why M&A deals die. Although this is a very painful subject, hopefully through sharing these reasons we can help some deals survive the M&A process. Here are my top 10 M&A deal killers (and some of the solutions).

2017

Recently, my firm surveyed about 20 PCB manufacturers in North America with an estimated greater than $10 million in revenue. Quite a few replied, and we have spoken with many others throughout the year, which gives us a good view on the state of the PCB market. If I did not contact your shop recently, it is because we already talked within the last 12 months.

In the M&A world, there are companies that make it easy (or at least easier) and those that make it difficult. By making the process easier, sellers should see better valuations and terms, and have a smoother deal process.

PCB acquisitions in the U.S. are down so far in the first five months of 2017, with only two announced deals (HT Global Circuits’ acquisition of Pho-Tronics in April; American Standard Circuits’ acquisition of Camtech in May); and one anonymous deal that I am aware of that has not been announced. This compares with 11 announced deals in 2016. There are a variety of reasons for the decline, but one reason could certainly be the valuation gap between buyer and seller.

When selling a house, the owner’s agent puts a sign in the front yard, posts info on the Web, and invites buyers over for an open house. When selling a car, we put a sign on the windshield and take out an ad with our phone number on it. However, when selling a business, some owners do not even tell their spouses.

Somehow, there is a still a stigma that selling a company is a negative for the owner. Many people think that there must be something wrong, otherwise, they would not be selling. In reality, exiting a business should be looked at as a triumph for the owner, not a defeat.

I have worked with a wide range of companies in the PCB, PCBA, and other tech and electronics sectors. Through the years, I have developed some ideas on how companies can improve their valuation. Some of these ideas are simple and involve little cost, other ideas are more long-term and involve more effort or investment.

The quick answer is ASAP. Even if you are not considering the sale of the company for 5−10 years, it is best to be educated and prepared. Give your advisor (or a few advisors) a call to discuss what can be done to get the company ready for a future sale. The worst time to call an i-banker or business broker is when you are forced to sell due to poor performance, health issues, pending bankruptcy, or dispute with a partner or manager.

Mergers and acquisitions in the U.S. PCB sector have been in the news recently, with at least 12 deals completed over the past year, and several more in the works. In contrast, the EMS sector has been relatively quiet, but that may change now that the presidential election is over.

If you are looking to sell or buy a business, you will most likely come across the term ‘adjusted EBITDA.’ Other common terms are adjusted cash flow, owner’s discretionary earnings, earnings after add-backs, etc. What do these terms mean, and why are they important?

One of the quickest ways to grow a business is to acquire another business. At the same time, acquiring a business can be risky, and a really bad deal may put your original business in jeopardy. Here are some tips on how to make acquisitions.

Here’s a scenario: An owner has gone to market and is starting to get feedback from buyers, and shockingly, not everyone appreciates the hard work and achievements that went into the business. Buyers may not understand the business, or they may be trying to position things for a low offer. In any case, it is important to know how to work with buyers.

When preparing to sell, remember the old saying, “He who represents himself has a fool for a client.” While many owners might be tempted to go it alone, in my experience it pays to have a deal team to help prepare a company (and the owner) for a sale

You are thinking of selling your PCB or assembly shop. Perhaps you are contemplating retirement, you have no successors, and the thought of going to the office on Monday is driving you crazy. This column is designed to help your planning efforts. Future columns will go deeper into each subject